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MERICS
PAPERS
ON CHINA
EVOLVING MADE IN CHINA 2025
China’s industrial policy in the quest for
global tech leadership
Max J. Zenglein | Anna Holzmann
No 8 | July 2019EVOLVING MADE IN CHINA 2025 China’s industrial policy in the quest for global tech leadership Max J. Zenglein | Anna Holzmann
Content
Acknowledgements........................................................................................................................................... 7
Executive Summary........................................................................................................................................... 8
1. China’s industrial policy at a crossroads............................................................................................. 17
1.1 "Made in China 2025" seeks to localize high-tech value chains......................................................... 19
1.2 Four years into MIC25: Measured progress in industrial upgrading................................................. 20
1.3 Catching up and leapfrogging: A differentiated approach to conquering high tech............ 23
1.4 Foreign tech dependency is China’s Achilles heel........................................................................................ 24
2. Readjusting China’s trajectory for global tech leadership:
MIC25 in implementation mode............................................................................................................ 27
2.1 China has created a network of mutually reinforcing innovation policies................................... 30
2.2 Beijing is adjusting priorities in advancing its innovation offensive ............................................. 32
2.3 Beijing wants to centrally coordinate local innovation............................................................................ 36
3. Optimizing China’s state-private industrial innovation nexus.................................................. 41
3.1 Leveraging the private sector for national goals.......................................................................................... 43
3.2 MIC25 is a testing ground for different financing vehicles.................................................................. 44
3.3 Making state-owned enterprises more efficient servants of industrial policy ...................... 45
4. European participation in China’s tech ambitions is a double-edged sword....................... 47
4.1 Bargaining chips, hard-to-get targets, or willing foreign partners:
China pursues bespoke strategies for each .................................................................................................... 49
4.2 China’s technological rise offers new business opportunities for foreign companies...... 52
4.3 MIC25 is already affecting Europe’s innovation environment............................................................ 52
5. Exemplary willing partner: Germany supports China’s advance
in business and research......................................................................................................................... 55
6. Strategies for coping with "Made in China 2025" – Learning from East Asia ..................... 61
Recommendations...................................................................................................................................................................... 65
Annex................................................................................................................................................................... 68
Endnotes............................................................................................................................................................. 74
Contributors....................................................................................................................................................... 77
4 | MERICS | PAPERS ON CHINA No 8 | July 2019Exhibits:
Ten core industries set the basis of Made in China 2025................................................................................................. 20
China has set ambitious targets
MIC25 policy plans prioritize digital and emerging industries......................................................................................... 21
Number of national-level action and development plans
China is building a complex next-generation AI industry.................................................................................................. 22
Policy focus on broad scope of tech developments
China's high-tech innovation relies on foreign components............................................................................................. 24
Strong dependence results in negative trade balance (in bn USD)
House of Cards: China's future ambitions stand on shaky ground................................................................................. 25
Dependence on foreign high-tech know-how remains high
Targeting China's weak spots....................................................................................................................................................... 26
Export controls for certain technologies and sectors as proposed by US Department of Commerce
From policy design to implementation...................................................................................................................................... 29
Stages of Made in China 2025
Focused efforts for innovation on lower levels..................................................................................................................... 31
Comparison of MIC25 plans at different levels of government
China's industrial innovation policy network.......................................................................................................................... 32
MIC25 is one among many strategies
Pilot projects promote the cause of MIC25............................................................................................................................. 34
Manifold activities in industrial high-tech sectors bline
Roadmap 2015/Roadmap 2017.................................................................................................................................................. 35
New energy vehicle industry, domestic market share (in percent)
Beijing wants industrial development to focus on next-generation IT & new materials...................................... 36
Number of provinces/municipalities focusing on certain sectors
China's vision for a homegrown chip industry....................................................................................................................... 38
Regional foci of IC-related production
"Made in China 2025" materializes in a nationwide network.......................................................................................... 39
Manufacturing innovation centres and demonstration areas
China’s strategic grid of engagement with foreign partners........................................................................................... 49
Approach depends on strategic value for tech transformation
China is hungry for foreign intellectual property rights..................................................................................................... 51
Payments for IPR has increased dramatically
German actors contribute to China's technological advance............................................................................................ 58
Examples of German-Chinese R&D cooperation
Sino-German pilot projects focus on industrial cooperation............................................................................................. 59
Number of MITT-awarded pilots with German participation
Asia is feeling the heat much more than Europe.................................................................................................................. 63
Importance of economic relations with China
Textboxes:
The MIC25 Technology Roadmap............................................................................................................................................... 32
MERICS | PAPERS ON CHINA No 8 | July 2019 | 56 | MERICS | PAPERS ON CHINA No 8 | July 2019
Acknowledgements
Acknowledgements
This report owes thanks to many colleagues at MERICS as well as external experts. Without
their valuable feedback and support we would have not been able to complete our year-
long research effort. We are very grateful for the support and insights we have received
during our research trips to China, Japan and Taiwan. However, due to privacy issues we
will only name MERICS staff.
We are grateful for comments and recommendations given by Frank N. Pieke (Director),
Mikko Huotari (Deputy Director), and Kristin Shi-Kupfer (Director of the Research Area
on Public Policy and Society). Their expertise helped us to improve our argument and the
structure of the report.
We would like to especially acknowledge the extensive contribution by Claudia Wessling
(Head of Publications and Product Development) and her team in producing this report.
Special thanks go to Alexandra Hinrichs (Graphic Designer) for creating the many exhibits
as well as Gerrit Wiesmann for editing the text. Many thanks also to Kerstin Lohse-Friedrich
(Director of Communications) and the communications team for their support in rolling out
this report.
We are also indebted to the research support by our interns: Aymeric Mariette, Fynn Heide,
and Andreas Mischer.
Finally, we would like to point out that the authors bear sole responsibility for this report
and any remaining errors.
Max J. Zenglein and Anna Holzmann
Berlin, July 2019
MERICS | PAPERS ON CHINA No 8 | July 2019 | 7Executive Summary
FROM BLUEPRINT TO IMPLEMENTATION: “MADE IN CHINA 2025” IS HERE TO STAY
Four years ago, China launched an ambitious plan to become a leading global technologi-
cal superpower by 2049. Party and state leader Xi Jinping himself made the strategy “Made
in China 2025” (MIC25) his signature project, reflecting how crucial it is to China’s future
development. The strategy defines ten core industries, such as robotics, power equipment
and next-generation IT, in which China wants to achieve major breakthroughs and create
globally competitive companies.
Backed by industrial policy, massive financing, and subsidies in the hundreds of billions of
US dollars, both state and private companies aim to build the technological foundations of
the “China Dream,” a revitalization of the nation the Chinese Communist Party (CCP) has
been promoting vigorously under Xi ahead of two important centenaries. For the party’s 100th
birthday in 2021, China aims to become a moderately prosperous nation, while for the 100th
anniversary of the People’s Republic of China in 2049, it aspires to become a “global manufac-
turing”, “cyber”, and “science and technology innovation superpower”.
In Western industrialized countries, China’s ambition has caused considerable irritation. Busi-
nesses and experts assessed that China was using unfair business practices and stealing tech-
nology in its efforts to become the world’s tech superpower. MIC25 has fueled concerns that
foreign competitors would be pushed out of the lucrative Chinese market and face fierce com-
petition in third markets, while China becomes not only more competitive in innovative sectors
of its own domestic economy, but also as the market shares of Chinese companies abroad grow.
China has responded to this criticism from abroad by toning down its references to the plan.
Beijing directed media coverage and official statements on MIC25 to be dialed back. Even the
name “MIC25” and trigger words such as “self-sufficiency rate”, considered indicative of Chi-
na’s efforts to replace foreign products and tech, were largely dropped from policy papers.
Xi did not mention “Made in China 2025” at this year’s Central Economic Work Conference,
nor did Premier Li Keqiang in the Government Work Report for the annual National People’s
Congress – two key events Chinese leaders traditionally use for setting strategic directives.
DROPPING THE RHETORIC OF MIC25 IS STRATEGIC
China has This is a tactical move: China has not at all abandoned its economic – and strategic – goal of
not at all aban- catching up with Western industrialized countries and gaining a competitive edge in high-
doned its goal tech and emerging technologies. Four years after its official launch, the strategy has moved
of catching up from blueprint to implementation. The MIC25 program is here to stay and, just like the GDP
with Western targets of the past, represents the CCP’s official marching orders for an ambitious industrial
industrialized upgrading. Advanced economies around the globe will have to face this strategic offensive.
countries
In the last decade, China’s growth has continuously slowed. In 2018, the economy expand-
ed by 6.6 percent, the weakest pace since 1990. The country also risks being caught in the
middle-income trap, a problem many developing countries faced when rising wages eroded
their comparative advantage, making them unable to compete with the productivity and
innovation of advanced economies. For China’s leadership, there is no alternative to sub-
stantially upgrading its industrial and economic base. It has to keep growth levels above 6
percent until 2021 to fulfill its promise of prosperity and maintain its legitimacy.
8 | MERICS | PAPERS ON CHINA No 8 | July 2019Executive Summary
MIC25 IS ROOTED IN EAST ASIAN DEVELOPMENT APPROACHES AND CONSTANTLY
ADJUSTED TO CHANGING REALITIES
To some extent, China and MIC25 follow the blueprint of Japan, South Korea, Singapore and
Taiwan in breaking through the ceiling of low-tech and labor-intensive manufacturing that
restricts the growth of developing and emerging economies. This “East Asian development
model” is characterized by industrial policies that target strategic sectors, and a strong gov-
ernment that effectively aligns business interests (state-owned as well as private) with na-
tional targets. Using this template, China hopes to successfully overcome the middle-income
trap and reduce its reliance on foreign technology.
Taking the Asian Tiger nations – South Korea, Taiwan, Singapore and Hong Kong – as an
example, MIC25 aims to move more sophisticated parts of the value chain and high-caliber
research and development into China. If successful, it would replicate achievements of the
electronics industry in other high-tech sectors. In electronics and ICT, companies like Haier,
Lenovo, Huawei, or DJI have today become international household names.
Because of its comprehensive and adaptive nature, the efficiency and success of MIC25 are
difficult to evaluate. Since 2015, there have been setbacks due to planning mistakes that re-
sulted in overcapacities and inefficient allocation of funds.
But its implementation gained momentum two years ago in response to a slowdown of GDP
growth and the unfolding trade dispute with the United States. The strategy is constantly be-
ing adjusted to newly emerging challenges. By the end of 2018, the Chinese government had
issued a total of 445 authoritative documents detailing implementation measures. Local gov-
ernments continue to be highly active translating Beijing’s national vision into local directives.
Chinese policy makers have also constantly readjusted the ambitious targets for increasing
domestic market share in certain innovative sectors. According to the Technology Roadmap
2017, specifying the implementation of MIC25, China wants to reach a 90 percent market
share for new energy vehicles (NEV) and an 80 percent share for IT products for vehicles by
2025. Other targets include a certain number of patents per 100 million CNY in revenue, and
the development of quality brands.
CHINA IS DETERMINED TO DOMINATE SMART AND EMERGING TECHNOLOGIES
Chinese companies from more traditional high-tech sectors like aerospace, machine tools,
or software engineering face the challenge of catching up with foreign competitors. They do
not prioritize the development of top-notch products and global leadership and are content
to overcome existing technology gaps by building up sufficient (as opposed to state-of-the-
art) domestic expertise.
This is completely different for sectors crucial to the fourth industrial revolution currently China is setting
unfolding worldwide. In smart manufacturing, digitalization and emerging technologies, the pace in
China wants to leapfrog and leave foreign competitors behind. Technology gaps in these many emerging
fields are more fluid, and China sees the opportunity to assume a leading position right from technologies
the start. The tables have already started to turn: Today, China is setting the pace in many
emerging technologies – and watches as the world tries to keep pace.
China has forged ahead in fields such as next-generation IT (companies like Huawei and ZTE
are set to gain global dominance in the roll-out of 5G networks), high-speed railways and ul-
MERICS | PAPERS ON CHINA No 8 | July 2019 | 9Executive Summary
tra-high voltage electricity transmissions. More than 530 smart manufacturing industrial parks
have popped up in China. Many focus on big data (21 percent), new materials (17 percent) and
cloud computing (13 percent). Recently, green manufacturing and the creation of an “Industri-
al Internet” were given special emphasis in policy documents, underpinning President Xi Jin-
ping’s vision of creating an “ecological civilization” that thrives on sustainable development.
China has also secured a strong position in areas such as Artificial Intelligence (AI), new
energy and intelligent connected vehicles. The electric vehicle (EV) battery market is a pow-
erful example of how quickly such dynamics may unfold and global value chains are ab-
sorbed. In 2017, seven of the top ten EV battery companies were Chinese, accounting for 53
percent of the global market share. The expansion of China’s battery manufacturing capaci-
ties is in the pipeline and could amount to three times that planned in the rest of the world.
FOREIGN TECH DEPENDENCY IS CHINA’S ACHILLES HEEL
The Chinese government pushes the development of future technologies by providing finan-
cial support and by creating demand through, for instance, beneficial regulations or tax incen-
tives to quickly turn ideas from niche industries into products suitable for mass consumption.
However, dependency on foreign core components is still a major bottleneck for China’s
national tech ambitions. Its industry has considerable weaknesses in mastering founda-
tional technologies essential for developing an advanced high-tech sector in certain areas,
especially for the digital economy. This vulnerability is most evident in the fields of new
materials, semiconductors and key components for advanced machinery and machine tools.
Chinese tech firms have already experienced considerable difficulties when cut off from
access to chips or other high-tech components from abroad, as US trade measures against
companies like ZTE and Huawei recently illustrated.
House of Cards: China’s future ambitions stand on shaky ground
Dependence on foreign high-tech know-how remains high
High
Future technologies
Autonomous driving,
smart cities,
facial recognition
Core technologies China‘s level
Electric vehicle batteries, of strength
industrial robots,
Artificial Intelligence
Foundational
technologies
Semiconductors,
new materials,
basic research
Low
© MERICS
Source: MERICS
10 | MERICS | PAPERS ON CHINA No 8 | July 2019Executive Summary
Chinese planners are engaging on several levels to eliminate these weaknesses. First, the
country invests heavily in research. In 2018, the country spent around 300 billion USD on
research and development, nearly 2.2 percent of GDP. Sheer scale in absolute figures might,
at some point, give China an advantage over smaller industrialized countries that spend
much less. As a percentage of GDP, China’s R&D spending has already surpassed that of the
EU (2.1 percent).
Second, the government is pushing to more centrally coordinate the implementation of MIC25
and related industrial policies. Each region is assigned to focus a particular aspect of tech
development. Unlike previous national economic policy plans, MIC25 attaches more impor-
tance to private companies, entrepreneurship and market mechanisms while at the same
time improving the competitiveness of state-owned enterprises (SOEs) that are still consid-
ered crucial for the innovation drive. In the eyes of China’s leadership, this is part of an effort
to optimize China’s hybrid state capitalist system. But many contradictions associated with
simultaneously strengthening market forces and the role of the state remain unresolved.
CHINA MOBILIZES REGIONS AND PRIVATE COMPANIES TO MAKE MIC25 A SUCCESS
Since the official launch of MIC25 in 2015, the Chinese government has tried to learn from The Chinese
setbacks and mistakes. In moving from blueprint to implementation, the strategy is con- government has
stantly being updated. In 2018, for instance, China’s Ministry of Industry and Information learned from
Technology (MIIT) listed its key focal points: setbacks and
mistakes
Establishing local specializations and “MIC25 National Demonstration Zones”
Industrial Internet, emerging industries, establishing world-class industry clusters
Innovations in basic general technologies
Establishing manufacturing innovation centers
Fiscal support mechanisms
Pilot projects related to MIC25 serve as key drivers for the introduction of new technologies
into the real economy. In the past two years, around 90 percent of the almost 4,000 projects
were announced. Since the inauguration of the first MIC25 pilot city in Ningbo (Zhejiang), 30
more have been established nationwide. Each is tasked with developing specific MIC25-relat-
ed industries. A government plan details over 50 sub-industries and 115 industrial sub-fields,
ranging from jet engines to functional fiber and products using China’s Beidou navigation
system.
In 2018, the so-called MIC25 National Demonstration Zones (NDZ) were introduced as up-
graded versions of pilot cities and city clusters. The majority (65 per cent) of China’s most
promising top-20 smart manufacturing hubs have emerged from these zones. In addition,
the innovation center scheme envisions 40 national-level “core” centers and numerous
“supplementary” centers at provincial level.
China’s current advances in many technological areas would not have been possible without
the flourishing private sector, the origin of most innovative business models particularly in
the digital economy. Industrial policies like MIC25 seek to pair market vitality with strategic
ambitions. The development of business models involving AI, alternative energy vehicles,
facial recognition, big data, and digital payment and communication systems was main-
ly driven by private companies vying for business opportunities. The state has created the
space for this entrepreneurial spirit to thrive by pursuing a light regulatory approach.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 11Executive Summary
Chinese state-owned enterprises (SOEs) continue to play a critical role for the development
of strategic industries and high-tech equipment associated with MIC25. In so-called key in-
dustries like telecommunications, ship building, aviation and high-speed railways, SOEs
still have a revenue share of around 83 percent. In what the Chinese government has identi-
fied as pillar industries (for instance electronics, equipment manufacturing, or automotive)
it amounts to 45 percent. The success or failure of SOE reforms will therefore have a direct
impact on the ambitious MIC25 endeavor.
Increasingly, the private sector is expected to contribute to improving the competitiveness of
state assets. Pilots in mixed ownership reform have seen private companies taking stakes in
some of China’s largest SOEs. In another effort to improve their operation, the government
strives to achieve consolidation through mergers of private and state-owned entities.
IT REMAINS DIFFICULT TO PUT A PRICE TAG ON MIC25
MIC25 is backed China is investing hundreds of billions in making MIC25 a success, but it is difficult to put
by a large vari- a price tag on the strategy. Far beyond classical industrial subsidies, the implementation of
ety of financial MIC25 is backed by a large variety of financial tools, ranging from insurance compensation
tools far beyond schemes to tax incentives, facilitated SME financing, and direct funding for MIC25-related
classical indus- demonstration zones and (pilot) projects.
trial subsidies
Major state-owned banks such as the China Construction Bank (CCB), the Industrial and
Commercial Bank of China (ICBC) and the China Development Bank (CDB) offer financing. In
November 2016, CDB pledged an estimated 300 billion CNY to the implementation of MIC25
over the next five years. Reportedly, in March 2018, there were more than 1,800 government
industrial investment funds with an aggregate size of about three trillion CNY.
The variety of financing schemes, often involving local governments, SOEs and banks, make
a precise estimate almost impossible. Local authorities clearly tend to overstate the size of
collected funds in order to signal compliance with central government policies, and funds
pledged are often much higher than those eventually deployed.
EUROPEAN PARTICIPATION IN CHINA’S TECH AMBITIONS IS A DOUBLE-EDGED SWORD
China’s MIC25 strategy is mainly a domestic policy aimed at boosting indigenous capabil-
ities. It is complemented by outward-facing approaches to secure access to foreign know-
how and reduce tech dependency. To reach its ambitious goal of moving entire high-tech
production cycles into the country, China is pursuing a multi-pronged approach in dealing
with foreign partners. These can be categorized in three groups:
Bargaining chips: These are foreign companies in industries that China’s economic plan-
ners consider to be of lower strategic value. This is the case for consumer goods such as
restaurant franchises or retail. The automotive sector has also moved into this category, as
much of its production has already moved to China and is less important for further upgrad-
ing. Measures like dropping the joint venture requirement in the automobile sector are used
by Chinese interlocutors as bargaining chips in reciprocity negotiations. But they are far less
significant for foreign companies than they would have been a decade ago.
Willing tech partners: The Chinese government strives to convince foreign companies to
move the most sophisticated parts of their value chain to China, with the aim of upgrading
domestic industry and either directly or indirectly leading to the desired incorporation of
12 | MERICS | PAPERS ON CHINA No 8 | July 2019Executive Summary
value chains into the economy. The consumer electronics sector is an example of the suc-
cessful implementation of this strategy: China started off merely assembling products but
now produces more sophisticated foundational technology and other key components.
Hard-to-get tech targets: Leading foreign tech companies that retain the most important
parts of their value chains outside China are more difficult to approach. In seeking access
to their know-how and technologies, the Chinese government uses different strategic ap-
proaches, such as a) attracting companies with offers of improved market access or more
lenient joint-venture requirements, b) acquiring companies or know-how crucial for MIC25
via Foreign Direct Investment, c) head-hunting or even industrial espionage or cyberattacks.
In 2018, 58 percent of the value of Chinese FDI in Europe could be attributed to core indus-
tries of the MIC25 strategy.
China's strategic grid of engagement with foreign partners
Approach depends on strategic value for tech transformation
high
Degree of strategic importance of industry
Hard-to-get Willing
tech targets tech partners
Bargaining
chips
low
low high
Degree of internalization into China's industrial value chain
© MERICS
Source: MERICS
MIC25 IS ALREADY AFFECTING EUROPE’S INNOVATION ENVIRONMENT
Foreign companies with sought-after technology can currently benefit from China’s indus-
trial upgrading. However, governments, policy makers and companies should look beyond
short-term business opportunities and take more systemic effects into account. China’s in-
novation offensive will affect the competitiveness of other nations in many high-tech sectors.
Its dynamics are already affecting Europe’s innovation environment and industrial founda-
tions on several levels:
China’s pulling ahead in emerging technologies will change the market environment for
European companies. This is already visible in areas such as AI, electric vehicles (EVs)
and the EV battery industry.
The ability to offer more competitive prices for technology that might not be top-notch but
that is good enough will put pressure on European companies in a broader set of indus-
tries, also in third markets.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 13Executive Summary
Companies have started to divert R&D to China, especially in emerging industries.
Europe will feel the heat of this shift: Carmakers like BMW, VW and PSA have
already opened up facilities for electric vehicle R&D in China.
Fierce competition from Chinese companies might erode the profitability of European
companies and limit their ability to fund R&D. This could slow innovation in Europe,
allowing Chinese companies to close existing technological gaps at an even greater pace.
EXEMPLARY WILLING PARTNER: GERMANY BACKS CHINA’S INNOVATION OFFENSIVE
IN BUSINESS AND RESEARCH
Germany is one developed nation whose economic base could be directly threatened by Chi-
na’s ambitions. MIC25 is geared towards replicating the German concept of Industry 4.0. Si-
no-German tech, industrial and innovation collaboration ranges from fundamental research
to more hands-on training and tech application. Attracted by generous conditions offered
by Chinese counterparts, (mostly technical) universities and non-university research organ-
izations such as Fraunhofer Society, Max Planck Society and the Helmholtz Association of
German Research Centers are key actors in research collaboration with China.
So far, there has been little discussion over who profits most from this intense cooperation.
Many German actors seem to neglect the risk of unwanted technology and know-how trans-
fer in fields crucial for the advancement of their own industries.
EUROPE CAN LEARN FROM EAST ASIA
Compared to a geographically distant Europe, China’s immediate neighbors are already ex-
perienced in dealing with China. Europe can learn from this approach and their experienc-
es. China’s East Asian neighbors must manage a far more sophisticated set of challenges:
they depend strongly on China economically and at the same time need to consider issues
of national security. This is reflected, for instance, in a restrictive approach to investments
from and research cooperation with China. Compared to Europe and the US, Chinese invest-
ment flows with East Asian countries are largely a one-way street. Taiwanese and Japanese
investment in China is 26 and 35 times larger, respectively, than Chinese investment in both
countries.
With China becoming more of a competitor in recent years, clear limits were put in place that
defined the scope of cooperation. Although the responses are not identical, many have taken
measures to safeguard technology, for instance by introduction of strict investment regula-
tions for acquisition of high-tech companies and guidelines on preventing intentional and
unintentional knowledge transfer, or the development of incentives to reduce companies’
dependence on Chinese market. The examples of the leading industrial nations in East Asia
also show that taking active measures to safeguard key interests and know-how does not
necessarily result in a breakdown of economic relations.
14 | MERICS | PAPERS ON CHINA No 8 | July 2019Executive Summary
RECOMMENDATIONS
Our analysis shows how China’s industrial innovation is in full swing. MIC25 is here
to stay. European industrialized countries need to find answers for dealing with the
cooperative and competitive aspects of China’s offensive:
1. Improving Europe’s innovation system without copying China
ombine joint EU responses with small-group efforts of leading member states to
C
improve Europe’s innovation system and better exploit opportunities from current
technological changes.
Improve policy support for applied research by private entities. A better regulatory
environment and financial instruments should stimulate research and technology
adaptation in Europe.
Facilitate greater research collaboration within the EU. Take steps to improve coor-
dination and collaboration in Europe’s innovation landscape.
2. Doubling-down on the EU’s nascent China strategy for more
economic sovereignty
eassert core liberal values for a China strategy by defining areas of mutual
R
interest as well as division.
Prepare for negative (economic) consequences in defense of EU’s core interests.
Establish an efficient and reliable coordination mechanism to foster greater
alignment between Brussels institutions and member states.
Strengthen cooperation with like-minded countries and advanced East Asian
economies to advance global fair competition and technology standards.
3. Fine-tuning European China strategies to address high-tech competition
ecognize China’s persistent top-level push for tech independence and
R
spell out conflicts of interest.
Use China’s persisting dependence on foreign technology as leverage to
promote European interests.
Initiate steps to limit dependence on critical components from China.
Strengthen the role and coordination of European business associations in
assessing China’s high-tech policies and developing responses.
4. Safeguarding research and technological know-how
eview and monitor Sino-European agreements on science and tech cooperation.
R
Define criteria for government-initiated science and technology cooperation.
Introduce better safeguards against technology transfers.
Require mandatory reporting for cooperation in highly sensitive areas,
also in basic research.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 15Executive Summary 16 | MERICS | PAPERS ON CHINA No 8 | July 2019
1. China’s industrial policy at a crossroads
China's industrial policy at a crossroads
1. China’s industrial policy at a crossroads
China is currently facing a critical crossroads in its endeavor to achieve the ambitious devel-
opmental targets for 2049, the centennial of the founding of the Peoples’ Republic of China
(PRC). Despite its remarkable economic growth over the past decades, the People’s Republic
still faces major challenges. With a current GDP per capita of around 10,000 USD, China is
an upper-middle income country according to the United Nations (UN) classification.1 De-
spite its remarkable success China is still at risk of being caught in the middle-income trap,
just like many developing countries before, which lost not only their comparative advantage
due to rising wages but also their ability to compete with advanced economies in terms of
productivity and innovation.
The “Made in China 2025” (MIC25) strategy released in May 2015 was designed to help over- The strategy
come precisely this challenge. The Chinese government has set out to establish a strong, strives to turn
national innovation system. Backed by a forceful industrial policy that constantly strives China into a
to improve capital allocation, policy coordination and tech-related innovation, the aim is global hub for
to propel China through the middle-income trap and transform the nation into a globally high-tech indus-
competitive manufacturing superpower largely independent of foreign technology. But the tries
Chinese Communist Party (CCP) is also driven by a deeper political motivation: it needs to
ensure China’s economic well-being to legitimize its increasingly tight grip on the country.
Exemplary success stories like the East Asian development model and related industrial
policies, shed light on Beijing’s steadfast attachment to MIC25 and related policies.2 Just
like GDP targets of the past, MIC25 represents the CCP’s official marching orders for China’s
industrial upgrading.
1.1 "MADE IN CHINA 2025" SEEKS TO LOCALIZE HIGH-TECH VALUE CHAINS
MIC25 represents an industrial policy blueprint for building a world class innovation system
and achieving global dominance in key technologies. At its core the strategy defines ten pri-
ority industries, including aerospace, robotics and power equipment, in which China wants
to achieve major breakthroughs over the next decades (see exhibit 1). MIC25’s stated am-
bition is to pursue an innovation-driven and talent-based approach that puts quality first,
promotes green development, and supports not only future-oriented, but also traditional,
industries. In practice, the strategy sets specific market share targets for Chinese companies,
and defines strategic priorities (战略任务) and support mechanisms (战略支撑) that extend
far beyond the ten core industries. Using smart manufacturing as a backbone, the strategy
strives to turn China into a global hub for high-tech industries, absorbing and localizing
entire value chains.
Over the past 40 years, China has proven that it can succeed in doing this. This is prob-
ably best illustrated by China’s electronics industry, which was originally focused on the
simple assembly of a wide range of products like personal computers and mobile phones.
Today, the sector has developed highly specialized clusters of both foreign- and domestically
-owned original equipment manufacturers (OEMs). Similar to the Asian Tiger nations –
South Korea, Taiwan, Singapore and Hong Kong – more sophisticated parts of the value
chain were integrated to include research and development (R&D) and the creation of glob-
ally successful brands. Chinese companies like Haier, Lenovo, Huawei, or DJI have today
become international household names.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 19China's industrial policy at a crossroads
Exhibit 1
Ten core industries set the basis of Made in China 2025
China has set ambitious targets
Biomedicine & high-performance Next-generation
medical equipment IT
High-end computerized
New materials
machines & robots
Agricultural Aviation & space
equipment Ten core equipment
industries
Maritime engineering
Energy equipment
equipment &
high-tech ships
Energy-saving & Advanced railway
new energy vehicles transportation equipment
Main steps Milestones
2025 Major manufacturing power
2035 Global manufacturing power
2049 Leading manufacturing superpower
© MERICS
Source: State Council
It remains to be seen if China can balance the level of control for the state, reduce the de-
ficiencies of its industrial policy and build a globally competitive innovation system. The
China model aims to defy persistent beliefs that an authoritarian regime cannot develop a
competitive and innovative economy. If the CCP is successful, it will provide other countries
with an alternative economic model based on a heavy involvement of the state and con-
strained market forces.
1.2 F
OUR YEARS INTO MIC25: MEASURED PROGRESS IN INDUSTRIAL UPGRADING
Amid slower economic growth and the increasingly fierce trade dispute with the United
States, the implementation of MIC25 gained momentum two years ago. More a guiding mas-
ter plan than a concrete instruction, the strategy has been and is constantly being adjusted
to newly emerging challenges. Yet, the long-term objectives of upgrading national tech ca-
pabilities and of creating opportunities for technological leapfrogging remain unchanged.
20 | MERICS | PAPERS ON CHINA No 8 | July 2019China's industrial policy at a crossroads
The comprehensive and adaptive nature of MIC25 makes it inherently difficult to evaluate
the strategy’s efficiency and success as a whole. A plethora of individual targets was set as
part of MIC25. They are industry- or tech-specific and fluctuate between highly aggregated or
exceedingly detailed levels. Examples include market share targets for Chinese technology,
target quotas for smart equipment usage, a certain number of patents per 100 million CNY in
revenue, and the development of several quality brands. Progress assessments of MIC25 will
thus vary greatly depending on the chosen parameters and individual sectors.
China has already forged ahead in fields such as 5G networks (next-generation IT), high-
speed railways (advanced railway transportation equipment) and ultra-high voltage elec-
tricity transmissions (energy equipment). However, critical weaknesses have yet to be over-
come, in particular, regarding the development of home-grown foundational technology,
most notably in advanced semiconductors.
The ten core industries of MIC25 are clearly not all pursued with the same intensity (see
exhibit 2). In recent years, it has become apparent that China is prioritizing efforts in emerg-
ing industries and other fields conducive to the country’s digital and high-tech ambitions,
especially in areas related to next-generation IT and materials. Policy efforts, however, focus
on a general upgrade of manufacturing capabilities.
The MIC25 strategy and the embedded web of industrial policies should be assessed as a tool
to steer the behavior of companies and local governments along these broad and shifting
national priorities. Measured against such a yardstick, there are clear inefficiencies, but al-
together MIC25 is now established as a forceful catalyst for industrial upgrading.
Exhibit 2
MIC25 policy plans prioritize digital and emerging industries
Number of national-level action and development plans
2015* 2016 2017 2018
18 (Manufacturing)
industry upgrade
16
14
12
10
8
6
Other
4 industries
2
0
bo d
en y
n
er w
NE ng
sh g
e e
en l
en e
en y
pm ra
pm a
ro rize
pm rg
pm c
pm c
io
h rin
at Ne
ui ilw
IT
ls
Vs
s
Ag nt
t
ts
t
t
t
ui an
ui spa
ui ltu
& avi
at
ip
ui ne
ia
ec e
s ute
eq rm
eq d ra
-t ine
er
eq ricu
s
eq E
eq &
-
en
al fo
gy
ne p
gh g
n
e
hi m
&
ic er
hi en
M
-g
tio
tio nc
er
ac co
ed -p
xt
En
ta a
ia
& e
v
m gh
n
m nd
om ent itim
Ne
Av
or Ad
hi
-e
r
gh
&
pm Ma
e
Hi
sp
in
ic
an
ed
tr
ui
* May – December
eq
© MERICS
Bi
Source: MERICS
MERICS | PAPERS ON CHINA No 8 | July 2019 | 21China's industrial policy at a crossroads
Looking at this bigger picture, two industry-spanning priorities covered by MIC25, smart
manufacturing and AI, have developed rapidly and are likely to have important medium-
and long-term structural effects. By now, more than 530 smart manufacturing industrial
parks have popped up in China. Most of them focus on big data (21 per cent), but new mate-
rials (17 per cent) and cloud computing (13 per cent) feature prominently, too.3 AI is part of
MIC25’s next-generation IT industry and covers a broad range of interconnected fields that
span virtually everything from hardware to software and tech applications such as facial
recognition or interconnected vehicles (see exhibit 3).
Exhibit 3
China is building a complex next-generation AI industry
Policy focus on broad scope of tech developments
Supplier Manufacturer Vendor
Smart products
Smart Smart Video image Smart
connected cars service robots identification systems home products
• Autonomous driving • Smart household • Video surveillance • Smart security
operating systems service robots security (check) • Smart home appliances
• Autonomous driving • Smart education robots identification systems
smart chips • Smart public service robots • Smart terminal face
• Automotive communica- • Smart special type robots recognition systems
tion systems • Smart surgical robots
• Smart customer service
robots
Smart voice Smart Medical image-assisted
Smart drones
interaction systems translation systems diagnostic systems
Key equipment
Smart Smart Smart Smart
industrial robots control equipment detection equipment logistics equipment
Core (tech) foundations
(Terminal) neural Open source platforms
Smart sensors
network chips (for R&D)
+
Support systems
Smart network Internet security Industrial training Standard testing &
infrastructure guarantee systems resource pool IPR service platforms
• Smart upgrade of 4G/5G • AI safety technology service
network infrastructure platforms
• Industrial Internet network • AI applications for the Internet,
infrastructure, supporting information and data security
smart industry applications • AI terminal security protection
• Car network infrastructure systems
© MERICS
Source: MIIT
22 | MERICS | PAPERS ON CHINA No 8 | July 2019China's industrial policy at a crossroads
1.3 CATCHING UP AND LEAPFROGGING: A DIFFERENTIATED APPROACH TO CONQUER-
ING HIGH TECH
The implementation of MIC25 benefits from an increasingly sophisticated, technologically
capable and large domestic market. There is sufficient demand and potential competition
within the country, especially in traditional high-tech sectors, including aerospace, machine
tools, or software engineering, to compensate for technological deficiencies.
Despite some improvements in areas such as high-speed railways or telecommunication Chi-
nese companies from these traditional high-tech sectors struggle to compete internationally
and are faced with the challenge of catching up with their foreign competitors. National
policies regarding these sectors reflect that China’s planners have in a way put up with this
situation. They do not pursue the development of top-notch products and global leadership
in these fields with the same vigor and rather seek to overcome existing technology gaps by
building up sufficiently capable (as opposed to state-of-the-art) domestic expertise.
From this point of view, lagging one or two generations behind the global technological
frontier is deemed acceptable. Despite the deficiencies Chinese planners see more immedi-
ate opportunities to emerge as a serious global competitor due to its large domestic market
and growing international clout. One example is the production of passenger jets: both the
single-aisle C919 and wide-body CR929 are set to take market share from Airbus and Boeing,
first in China, but increasingly on global markets over the next ten years.
When it comes to emerging technologies and digitalization, China aspires to leapfrog and China aspires
overtake foreign competitors. In 2016, the Central Committee of the CCP and the State Coun- to leapfrog and
cil jointly issued an “Outline of the National Innovation Driven Development Strategy (国家 overtake foreign
创新驱动发展战略纲要)”. The concept outlines the ambition of using the dynamics to leap- competitors in
frog and get ahead of other nations.4 The technology gaps in emerging industries are more emerging tech-
fluid, and China hence sees the unique opportunity to assume a leading position right from nologies and
the start. The tables have already started to turn. Today, China is setting the pace in many digitalization
emerging technologies – and watches the world trying to keep up.
China has already secured itself a strong position in areas such as AI, new energy (electric
and hydrogen) and intelligent connected vehicles. The government pushes the development
of future technologies by providing financial support and by artificially creating demand
through, for instance, beneficial regulations or tax incentives to quickly turn ideas from
niche industries into products that are suitable for mass consumption.
The electric vehicle (EV) battery market serves as a powerful example of how quickly such
dynamics may unfold and global value chains are absorbed. In 2017, seven of the top ten
EV battery companies were Chinese, accounting for 53 percent of the global market share.
Further expansion of China’s battery manufacturing capacities in the pipeline could amount
to three times that planned in the rest of the world.5
In many of these rapidly developing emerging tech areas, a build-up of overcapacities (sup-
ply outstripping demand due to overzealous top-down planning) is likely, but could have
perverse positive effects for China. A build-up of (over)capacities could help Chinese com-
panies gain a dominant foothold in, first, the domestic and, second, the global market. By
absorbing the value chains early on, know-how can now be generated in China. Foreign
companies then have little choice but to be locally present if they want to benefit from these
dynamics.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 23China's industrial policy at a crossroads
1.4 F
OREIGN TECH DEPENDENCY IS CHINA’S ACHILLES HEEL
Even though the country is particularly strong in the application of future technologies, its
dependence on foreign high-tech products remains a major bottleneck for national tech am-
bitions. The most advanced components and machinery still need to be imported. Adjusted
for computers and telecommunication equipment, China’s reliance on foreign technology
results in a negative trade balance, according to the Chinese National Bureau of Statistics’
(NBS) own definition of high tech, which includes the high-end spectrum of biotechnology,
life science and technology, opto-electronics, electronics, computer-integrated machinery,
and aerospace (see exhibit 4).
Exhibit 4
China’s high-tech innovation relies on foreign components
Strong dependence results in negative trade balance (in bn USD)
High-tech products* High-tech products (excl. computers and telecommunication)
150
100
50
0
-50
-100
-150
-200
-250
-300
-350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
*According to NBS definition: Biotech, life science, opto-electronics, electronics, computer and telecoms, chips, aerospace
© MERICS
Source: NBS
If China wants to establish a sound foundation for more advanced, future technologies, then
it has to master these “basics” largely independent of foreign input. But the country still has
a long way to go. China still suffers from considerable weaknesses in mastering foundational
technologies necessary for enabling technological progress. This vulnerability is most evi-
dent in the fields of new materials, semiconductors and other key components for advanced
machinery and machine tools.
Building the underlying ability in basic research takes time and remains a major weak spot
despite a steady increase in research and development spending. In 2018, China spent
around 300 billion USD on R&D, nearly 2.2 percent of GDP. It aims to increase this share to
2.5 percent in 2019. As percentage of GDP China’s R&D spending has already surpassed that
of the EU, which is currently at 2.1 percent.6
24 | MERICS | PAPERS ON CHINA No 8 | July 2019China's industrial policy at a crossroads
Despite this steady increase, China still needs to overcome hurdles in matching quality.
Chinese companies still achieve lower yields on intangible investments, including R&D, IPR,
designs and business processes compared to advanced economies.7 However, despite lower
efficiency, the sheer volume in absolute figures of R&D spending might, at some point, give
China an advantage over smaller industrialized countries that spend much less (see exhibit 5).
China’s technological progress would suffer a serious setback if access to foundational tech-
nology were permanently disrupted – regardless of China’s prominence in the application of
such technologies to certain industries such as facial recognition and autonomous driving.
Exhibit 5
House of Cards: China’s future ambitions stand on shaky ground
Dependence on foreign high-tech know-how remains high
High
Future technologies
Autonomous driving,
smart cities,
facial recognition
Core technologies China‘s level
Electric vehicle batteries, of strength
industrial robots,
Artificial Intelligence
Foundational
technologies
Semiconductors,
new materials,
basic research
Low
© MERICS
Source: MERICS
Chinese tech firms have already gotten into serious trouble when cut off from access to chips
or other high-tech components from abroad, as US measures towards companies like ZTE
and Huawei have proved in the ongoing trade row. As of this writing in June 2019, the US
administration is rolling out steps for stricter export controls of emerging and foundational
technologies as proposed by the US Bureau of Industry and Security (BIS) in November 2018.
New controls could also see an expansion of so-called deemed exports, i.e. transactions
involving controlled technologies in which these do not leave the country, which will further
limit the access of Chinese nationals to foreign know-how (see exhibit 6).
Access to core components and technology is a prerequisite for China’s advancement in
emerging industries. Applying industrial policies like MIC25 to reduce dependency on for-
eign providers will therefore remain an integral part of all Chinese economic strategies.
MERICS | PAPERS ON CHINA No 8 | July 2019 | 25China's industrial policy at a crossroads
Exhibit 6
Targeting China's weak spots
Export controls for certain technologies and sectors as proposed by US Department of Commerce
Category Sub-Categories Category Sub-Categories
Biotechnology • Nanobiology Logistics • Mobile electric power
• Synthetic biology technology • Modeling and simulation
• Genomic and genetic • Total asset visibility
engineering • Distribution-based
• Neurotechnology logistics systems
Artificial intelli- • Neural networks and Additive • 3D printing
gence (AI) and deep learning manufacturing
machine learning • Evolution and genetic Robotics • Micro-drone and micro-
technology computation robotic systems
• Reinforcement learning • Swarming technology
• Computer vision • Self-assembling robots
• Expert systems • Molecular robotics
• Speech and audio • Robot compliers
processing • Smart Dust
• Natural language
Brain-computer • Neural-controlled
processing
interfaces interfaces
• Planning
• Mind-machine interfaces
• Audio and video manipu-
• Direct neural interfaces
lation technologies
• Brain-machine inter-
• AI cloud technologies
faces
• AI chipsets
Brain-computer • Neural-controlled
Position, naviga- -
interfaces interfaces
tion, and timing
• Mind-machine interfaces
(PNT) technology
• Direct neural interfaces
Microprocessor • Systems-on-chip (SoC) • Brain-machine inter-
technology • Stacked memory on chip faces
Advanced comput- • Memory-centric logic Hypersonics • Flight control algorithms
ing technology • Propulsion technologies
Data analytics • Visualization • Thermal protection
technology • Automated analysis systems
algorithms • Specialized materials
• Context-aware Advanced Materials • Adaptive camouflage
computing • Functional textiles
Quantum informa- • Quantum computing • Biomaterials
tion and sensing • Quantum encryption Advanced Materials • Faceprint and voiceprint
technology • Quantum sensing technologies
© MERICS
Source: US Department of Commerce
26 | MERICS | PAPERS ON CHINA No 8 | July 2019You can also read
